If you run a limited company, there may well be further personal tax to pay on the dividends you receive.

You settle any dividend tax liabilities via the annual self assessment process. You can find out more in our initial article - what are limited company dividends.

Although you will already have to pay corporation tax on any company profits, you may also have a further personal tax liability on the amount of dividends you have drawn.

Dividend tax rates

All company dividends are taxed the same way - whether you're receiving investment income from a FTSE-listed company, or income from your own limited liability company.

There are several rates of dividend tax in the UK.

?10% on dividends for income received below the higher rate income tax threshold

?32.5% on dividends for income received above the higher rate income tax threshold.

?A new 'additional' dividend tax rate of 42.5% applies to individuals earning £150,000 or more from April 6th 2010 onwards.

Dividend Tax Credit

The actual rate of tax you pay in dividends will be lower than these headline rates, as dividends automatically receive a 10% tax credit. This takes into account the fact that you will already have paid corporation tax on your company profits.

So, for lower rate taxpayers, you will have no further tax to pay on dividends, as the 10% tax credit cancels out the 10% 'dividend ordinary rate'.

For any dividend income falling within the new additional rate band, the effective tax rate on that proportion of your income is 36.1%.

Caught by IR35?

For IT contractors and other business owners who are caught by the IR35 rules, you will receive your income in the form of a "deemed salary" rather than dividends, together with a 5% allowance to cover the expenses of running a limited company.

If you have any concerns about your IR35 status or paying dividend taxes in general, you should always consult your accountant.

How much dividend tax to pay?

If you have £40,000 in your company to distribute as dividends (the 'net dividend amount') to a sole shareholder (you), firstly you must multiply this amount by 100/90 to give you a 'gross dividend amount' of £44,444.44.

You will receive a notional tax credit of £4,444,44 (10% of this amount).

To work out your tax liability as a higher rate taxpayer, you take 32.5% of your gross dividend amount, which in this case is £14,444

You then subtract your 10% tax credit of £4,444, leaving a total tax liability of £10,000 (25% of the net dividend in this example).

In other words, in reality, you need to set aside 25% of your higher rate dividend income for tax.